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How are bonds taxed?

Inside tax-sheltered retirement accounts such as IRAs and 401(k)s, they're not taxed, just as stocks aren't - until you withdraw the money, that is (assuming you have a traditional plan, rather than a Roth).

Outside tax-sheltered accounts, the interest is taxed as regular income - at rates as high as 35%.

A note on Treasury Inflation Protected Securities (TIPS): You'll be taxed on the inflation adjustment to your TIPS' principal even though you don't reap that gain until the TIPS mature or you sell them.

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